Polish Gas Utility Braces for Deregulation

Like some large consumers of natural gas in Poland, a few weeks ago refiner PKN Orlen SA said it had signed short-term contracts to buy natural gas from five international or outside suppliers, or in other words, experimenting with ways to reduce its reliance on Poland’s gas monopoly and the mostly Russian gas it sells.

But Chief Executive Jacek Krawiec said that “due to our rising gas fuel consumption and favorable regulatory conditions, new suppliers can provide PKN Orlen with as much as 35% of its total natural gas needs.”

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How likely PKN is to hit that 35% level remains to be seen.

“PGNiG is the leader on the Polish gas market,” the company said in an email. “We’re taking actions to maintain this position and meet the strong competition that will emerge from liberalization.”

Like nearly all businesses and households in Poland, the company relies on the state-controlled utility PGNiG SA for most of its gas supplies, sold at prices set by the energy regulator. If everything goes as planned, the country will this summer finally move to market-determined gas prices for its biggest gas-consuming companies.

The European Union is pressing the country to step up deregulation of the energy market as part of its push to create a common EU energy market. Currently the market is fragmented along national borders with most domestic markets dominated by a few companies.

Poland, like some other former members of the Soviet Bloc, is lagging behind in this area. The country used to be able to buy discounted Russian gas, so previous government administrations didn’t see the need for alternative sources. The gas price was linked to oil, and oil prices were low in the 1990s.

Energy diversification became a strategic goal only in the last decade and progress has been slow.

Meanwhile, PGNiG has used its know-how to stay ahead of the transition to an open market, turning it to its advantage.

It has set up a German subsidiary, an energy sales and trading company, and has reserved most of the capacity at pipelines on the Czech and German borders, through which Poland imports about 6% of its annual consumption, according to the energy regulator.

PGNiG says it reserved this capacity fairly, in a procedure run by pipeline operator Gaz-System that was open to any interested company.

PGNiG buys about 63% of its gas from Russia through a long-term contract with OAO Gazprom and produces the rest, then resells this gas at a margin set by the regulator.

Some analysts say this business model could break down if cheaper gas from Western Europe, most of it also originally from Russia, can be sold in Poland in significant quantities, below PGNiG’s import costs, in coming years when more interconnector capacity opens up.

These analysts suspect Poland’s government would compensate PGNiG if market forces undermine its take-or-pay contract with Gazprom.

As part of its energy diversification drive, Poland is building a liquefied natural gas terminal on the Baltic coast, scheduled to open in mid-2014, which will have annual import capacity of 5 billion cubic meters of gas. PGNiG has reserved 1.5 bcp of the terminal’s capacity through 2034.

Inside Poland, PGNiG owns and uses most of the gas storage facilities indispensable for companies to be considered reliable gas suppliers.

“All storage volumes are offered on Third Party Access principles to all interested customers,” PGNiG said.

Poland’s domestic gas exchange, wholly owned by the Warsaw Stock Exchange, is in its infancy, with virtually no trading. The regulator has advised Poland’s parliament to force 30% of annual consumption volumes to be sold through the exchange by July, but it remains unclear whether lawmakers will pass the law in time.

In the meantime, for Poland’s large gas consumers, like PKN Orlen or chemical and fertilizer companies, weaning themselves from PGNiG’s gas supplies means looking to the liquid German market.

PKN Orlen said it had secured the right to trade natural gas on the European Energy Exchange in Leipzig, Germany, which will let PKN Orlen take advantage of price differences between the Polish and European markets.

“The German market is the benchmark,” said Kamil Kliszcz, an analyst at BRE Bank, who covers both PKN Orlen and PGNiG. “If you want to buy gas in Germany you have to buy it on the German exchange.”

He added that PKN Orlen, like Poland’s other large gas users, is training or hiring people who will know how to build a portfolio of gas contracts to prepare for deregulation.

PKN Orlen said it can’t take full advantage of the opening up of Poland’s gas sector until the state-controlled gas pipeline operator or private investors build more pipeline links to gas markets abroad and until the procedures to change gas suppliers are legally clarified.

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We as Hungarians :
SAYING Thanks to our Polish brothers and sisters for your support !
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